Freight car market “better than expected”: KeyBanc

The Railway Supply Institute American Railway Car Institute’s (ARCI) second-quarter 2016 freight car order, delivery and backlog statistics are “somewhat better than expected,” according to KeyBanc Capital Markets analyst Steve Barger.

Orders in the quarter increased sequentially to 7,555 cars from 6,646 in first-quarter 2016. Carbuilders delivered 15,655 railcars in the quarter, following last quarter’s delivery figure of 16,834. The backlog now stands at 89,155 units, down 6.2% from the prior quarter’s 95,038, though still at historical highs. Industry book-to-bill came in at 0.5x, slightly better than last quarter’s figure of 0.4x. In the quarter, respective book-to-bill for tank car and non-tank car activity was 0.7x and 0.4x, respectively, vs. 0.2x and 0.5x, respectively, in first-quarter 2016.

“We think the sequentially stronger book-to-bill for tanks reflects a reversion to a replacement market with modest growth in some non-O&G car types,” Barger said.

Non-tank car orders totaled 4,363 units in the quarter vs. 5,729 n 1Q16. Covered hoppers, which showed the largest concentration in orders, totaled 2,017 railcars, or about 27% of the total, below last quarter’s 51%, with medium-cube covered hoppers representing the majority of the orders at 1,286 cars, vs. 2,020 cars ordered in 1Q16. Orders for large-cube and small-cube covered hoppers were 708 and 23 cars, respectively, vs. 1,335 and 0, respectively in 1Q16. Orders for tank cars totaled 3,192 vs. 917 in 1Q16. Together, tank cars and covered hoppers accounted for more than 69% of total orders in the quarter vs. 64% last quarter.

Second-quarter 2016’s deliveries of 15,655 in the quarter break down into 4,318 tank cars and 11,337 non-tank cars. Though 2Q16 tank car deliveries fell 27% sequentially, “we think current tank deliveries imply that the industry enjoys roughly 5.5 quarters of tank backlog visibility,” Barger noted. “On current deliveries, we think the backlog implies just under 6 quarters of theoretical production visibility. The tank car backlog decreased about 4% sequentially to 24,424 cars, while the non-tank car backlog moderated to 64,731, down from last quarter’s 69,488. We think the industry backlog continues to trend toward a more ‘normal’ distribution, with 27% tank cars, 20% small-cube covered hoppers, 18% medium-cube covered hoppers and 13% large-cube covered hoppers.”

“Additionally, we think the industry benefited from a net increase in a small-cube covered hopper backlog totaling 2,618 railcars,” Barger said. “We suspect this could be the result of negotiations with customers, whereby some cars are coming out of cancellation. The industry saw 5,793 cancellations in 1Q2016, 4,847 of which were for small-cube covered hoppers. Given that the industry numbers are likely somewhat better than expected, we think this order activity and backlog support our view that low end 2017 consensus estimates for railcar OEMs Greenbrier and Trinity are likely too conservative.”